Reforming Financial Regulation
Reforming Financial Regulation
What needs to be done
This chapter calls for a careful consideration of the agenda and criteria for financial regulatory reform in view of the differing circumstances, experiences, capacities, and capabilities of various economies in the international financial system. The global financial crisis that started in 2007 follows many costly crises in developing economies over the last three decades. Like previous ones, it is the result of inherent flaws in the way financial markets operate coupled with insufficient, incomplete, and sometimes inappropriate regulation. This chapter argues that liberalization of financial markets has been a major cause of costly crises, especially in the last two decades. With the emergence of a shadow banking system, which remains opaque and unregulated, the chapter suggests that regulatory reform needs to be comprehensive in order to avoid regulatory arbitrage and should also strive to be countercyclical to try to compensate for the inherently pro-cyclical behavior of financial markets. It also proposes some key criteria for reforming financial regulation involving capital provisions and liquidity requirements, taking into account the perspectives and needs of developing countries.
Keywords: international financial system, financial crisis, financial markets, liberalization, shadow banking, regulatory reform, financial regulation, capital, liquidity, developing countries
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